Fintechs Encouraged to Create Self-Regulatory Bodies for Ensuring Statutory Compliance
RBI’s Call for Self-Regulation in Fintech Sector
On the 15th of January, 2024, the Reserve Bank of India (RBI) issued a significant announcement where it urged fintech companies to establish a self-regulatory organization (SRO). This initiative is part of RBI’s drafted framework promoting self-regulation within the rapidly evolving fintech sector.
RBI firmly believes that fintech firms should take the initiative in creating an SRO responsible for ensuring full statutory and regulatory compliance. The primary aim of such an organization is to establish codes of conduct designed to foster transparency, promote fair competition and protect consumer rights among its fintech members.
Strengthening Governance and Addressing Challenges
As per the RBI’s draft norms, the self-regulatory body should actively work towards strengthening governance standards. It should also address the multifarious needs and challenges inherent within the digitally-driven sector. According to the central bank, achieving infrastructural innovation while meeting regulatory priorities, all the while protecting consumers and containing risks, is pivotal to the contribution optimization of the fintech sector.
With a preferred approach towards self-regulation, fintech companies are thus entrusted with the responsibility of striking a healthy balance between the aforementioned principles.
The Need for the SRO
The timing of the draft framework coincides with the fintech industry’s rapid expansion propelled by robust demand for digital payments. Consequently, an SRO becomes essential to ensure adherence to industry standards and to streamline transparent communication between fintech companies and the RBI.
As per the draft norms, the organization is expected to consult with the RBI on developing and frequently updating the taxonomy used within the fintech sector. Furthermore, the SRO is mandated to undertake any tasks assigned to it and provide any relevant information requested by the central bank.
Operational Transparency and Accountability
In a move promoting operational transparency, the RBI norms further empower the regulatory body to inspect the books of the fintech self-regulatory body or arrange audits as necessary. This ensures that the SRO is held accountable at all times and that it operates within a framework that remains compliant with the best industry standards.
The board of the self-regulatory body, according to the draft, is obliged to establish a framework for ongoing monitoring of its directors to ensure a “fit and proper” status.
Invitation for Feedback on Drafted Framework
In a demonstration of its progressive approach, the RBI has invited feedback on the draft framework from industry stakeholders. The deadline for submission is the end of February, after which a final, refined framework will be issued taking into account the received inputs.
Overall, this move by the RBI paves the way for the fintech industry’s orderly and accountable growth. It imposes responsibility where it matters, fostering transparency, adherence to compliance, and a steadfast commitment to consumer protection.
RBI’s Call for Self-Regulatory Organizations in Fintech
On the 16th of January, 2024, the Reserve Bank of India(RBI) made a forward step by issuing draft norms for the establishment of self-regulatory organizations (SRO) in the fintech industry. With a call for applications, RBI expressed the need for SROs in either the sector as a whole or for individual sub-sectors. The accepted number of SROs will be entirely dependent on the volume and nature of the applications submitted.
Accommodating the draft norms, the SROs relating to Financial Technology (SRO-FT), should demonstrate absolute independence, devoid of any undue influence from a single or a group of members.
Broad Functions and Eligibility Criteria for the SROs
Issuing a draft framework opened up the RBI’s expectations for the purpose, governance standards and eligibility criteria obligatory for setting up an SRO-FT. In the framework, the fintech industry is free to decide if it requires a solo SRO or several of them.
The diverse nature of fintech, as noted by the RBI, means that sticking to merely a single SRO might water down some industry concerns, while multiple SROs may compromise the representative quality of self-regulation. Thus, an industry-wide consensus on these critical issues would pave the way for a much more effective self-regulation.
The Role of the SRO in the Fintech Sector
RBI has revealed its intention to invite applications for setting up SROs for fintech firms when necessary. The recognition of the number of SRO-FTs will hinge on the volume and the nature of the applications it receives.
Key stakeholders in the fintech industry have welcomed the RBI’s draft. They see this as not only a recognition of the significant role fintechs play in today’s economy but also as an understanding by the regulator that it cannot micro-manage every firm. As such, the SROs are crucial in providing a sphere of regulations that cater to the broad fintech community without stifling innovation, particularly essential for burgeoning sectors like digital lending.
Governance Standards and Responsibilities of the SRO
The draft norms recommend that the SRO-FT should operate independently. The SROs not only have to establish industry standards but also be responsible for oversight and enforcement. Functions like addressing grievances, dispute resolutions, and obligations towards the RBI will fall within their precinct.
In the words of the Central Bank, “Achieving a healthy balance between facilitating innovation by the industry on one hand, and meeting regulatory priorities in a manner that protects consumers and contains risk, on the other, is crucial to optimising the contribution of the fintech sector.”
Eligibility and Membership for the SRO
The norms require that applicants set up as not-for-profit entities demonstrating sufficient net worth and capability to establish the necessary infrastructure to shoulder the responsibilities of SRO-FT. The organization must consult with RBI in developing and updating the “taxonomy” for fintechs and must be ready to carry out any tasks assigned to it, supplying information as dictated by the Central Bank.
In conclusion, the drafting of norms for the establishment of SROs by RBI is a significant stride towards achieving a blend of healthy industry innovation and consumer-oriented regulation. Fintech firms as a whole can look forward to a future of inclusive representation, with effective governance and transparency put in place by the SROs. It’s indeed a leap into an era of self-regulation that fosters growth and instills confidence within the consumer base.
